Tracking Performance: Benchmarking in Mutual Funds

A benchmark in a mutual fund is a standard or index used to measure the fund’s performance. The comparison indicates how much a mutual fund scheme has earned instead of how much it should have earned.

Every mutual fund scheme aims to have benchmark returns. In case the fund beats its benchmark, it is considered to have performed well. The excess is referred to as the alpha of the fund. 

Market regulator Securities and Exchange Board of India (Sebi) has introduced various changes in this space, which include having the right benchmarks. For instance, it has mandated that all benchmarks should be shifted from the price index to the total returns index (TRI). A TRI takes dividends into account and is considered comparatively more accurate than a price index.

Essentially, it is crucial to evaluate the fund’s performance against its benchmark in the long run. Short-term returns are highly volatile; therefore, comparing short-term performance is not advisable.

Some of the popular benchmarks include the Nifty 50, BSE Sensex, and Nifty Midcap 250, among others.

Nifty 50 comprises the top 50 stocks by market capitalisation. Large-cap funds have Nifty 50 TRI as the benchmark.

BSE Sensex, which comprises the top 30 stocks by market capitalisation. Large-cap funds track BSE Sensex TRI as the benchmark.

Nifty Midcap 250 comprises the top 250 midcap stocks. Mid-cap funds track Nifty Midcap 250 as the benchmark.

In short, mutual funds perform better if the returns are higher than the benchmark. On the other hand, the fund’s performance is lower if the benchmark registers higher returns than the mutual fund. 

Furthermore, if the benchmark index has registered a steady decline over the duration of the mutual fund, the total assets also fell, but by a much lower percentage than the benchmark index, it can be stated that the fund has, in this case, outperformed the benchmark.